20th June 2019 - A dovish tone from the FOMC sees AUD rally


Good Morning,


Market Headlines

- Boris Johnson again comfortably won the round of voting to become the new Tory leader an UK PM. Little reaction again with the decision approaching.


- The FOMC left rates on hold as generally expected though issued a more dovish statement, removing references around patience in favour of acting as appropriate in terms of incoming data and saying that uncertainties have increased. Inflation and unemployment forecasts were lowered while the dot plot was mixed with 8 officials seeing rate cuts in 2019, 8 remaining on hold and 1 calling for a cut. There was also one dissenter with Bullard calling for an immediate 25bp cut.


- Australian 3yr government bond yields fell from 0.95%% to 0.91% - a record low, 10yr yields down from 1.38% to 1.33%. Markets are pricing a 55% chance of an RBA rate cut at the July meeting, but 100% chance for the August meeting.


Currencies

- The US dollar index is down 0.4% on the day.

- EUR initially rose from 1.1200 to 1.1254 but is currently back to 1.1230.

- USD/JPY fell from 108.50 to 107.90 and then steadied around 108.10.

- AUD initially jumped from 0.6870 to 0.6909 in response to the FOMC but then retraced to 0.6875.

- NZD similarly spiked from 0.6525 to 0.6563 before retracing to 0.6535.

- AUD/NZD wasn’t too ruffled, ranging sideways between 1.0515 and 1.0535.


Equities/Commodity Markets

- FTSE -0.5% at 7404, DAX -0.2% at 12309, CAC +0.2% at 5518, Nikkei +1.7% at 21334, ASX 200 +1.2% at 6648, Shanghai Comp +1.0% at 2918


- Dow +0.2% at 26504, S&P +0.3% at 2926, NASDAQ +0.4% at 7987


- Commodity CRY -0.6% -175.44, Nat. gas -2.1%, Cotton +1.4%, Crude +0.2%, Copper +1.8%, Wheat -1.6%, Sugar -0.7% Iron ore +2% Gold at $1359/oz


AUD Thoughts/Technical Outlook

A dovish tone from the FOMC saw US yields under pressure and the USD losing ground in offshore trade. US 2 year yields under 1.75% and the Euro/usd spiking briefly above 1.1250. AUD/USD rallying hard from under 0.6875 to 0.6909 before settling nearer 0.6885.


FOMC Chairman Powell driving some action across markets in offshore trade despite keeping rates steady. Macquarie’s David Doyle writing: as we outlined in early June, we anticipate two rate cuts ( total of 50 bps ) from the FOMC in 2019. Our base case at the time was for September and October. Today’s communication together with the softness in May payrolls ( and downward revisions ) suggests July is an increasing possibility.


Chair Powell repeated the phrase “we’ll act as appropriate to sustain the expansion” several times in his press conference. In our view, this shows a clear easing bias and a potential low bar in terms of data weakness required for the FOMC to act.


Technical levels to watch for

As the Fed leaves overnight rates unchanged AUD/USD is trading above its main SMAs suggesting bullish momentum in the near term.

- A sustained break above 0.6900 can send the Aussie to 0.6930 and 0.6960.

- Resistances are seen at 0.6880/0.6870 and 0.6855 level.


Event Risk Data Today

- NZ: Q1 GDP is expected to have increased 0.6%, 2.3% annually. That is stronger than the RBNZ’s forecast of 0.4%, and should support the RBNZ’s watch and wait stance.


- Australia: RBA Governor Lowe gives a speech titled “The Labour Market and Spare Capacity”, Adelaide 11:15 am. The RBA bulletin is released which contains articles on the Bank’s most recent research.


- Japan: the BOJ policy decision follows signalling from Kuroda that the Bank will ease policy if momentum towards their inflation target weakens.


- Euro Area: the EU Summit will debate and potentially decide on leadership positions over today and tomorrow. Both the new President of the European Commission and President of the ECB will take office in November. Jun EC consumer confidence is released.


- UK: the BOE policy decision is expected to be on hold. The Bank’s mild tightening bias will be in focus with market pricing having moved to around ½ a chance of a cut one year ahead from around ½ a chance of a hike at the time of the last meeting on May 2.


- US: Fedspeak involves Brainard and Mester at a Fed Listens event, and Daly holds a podcast on ‘community economics’.

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